Asian Bonds Brave Global Tensions, but Concerns Remain

Asian bonds held their ground as geopolitical tensions escalated. However, interest rate uncertainty, and cost pressures cast a shadow.

SSGA Fixed Income Portfolio Strategists

Asian bond markets were flat in February 2022, with the Markit iBoxx ABF Pan-Asia Index returning 0% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the index was down by -0.42% on a USD hedged basis. Cross-market performance was mixed, but Asia managed to weather the turbulence from the Russia-Ukraine War, unlike other emerging regions such as Central & Eastern Europe (CEE).

Market Local-Currency Return Foreign-Exchange (FX)  Return Return (in USD)
Thailand -0.07% 2.02% 1.95%
Indonesia 0.73% 0.10% 0.84%
China -0.34% 0.86% 0.52%
Malaysia 0.38% -0.32% 0.06%
Korea -0.60% 0.26% -0.34%
Hong Kong -0.21% -0.20% -0.41%
Singapore -0.65% -0.26% -0.91%
Philippines -1.89% -0.58% -2.46%

Recovery in Thailand supports a positive growth outlook

Thailand (+1.95%) was the best performer following a rally in its currency, the baht. This was driven by an optimistic medium-term outlook for Thailand’s economy as COVID-related restrictions were eased. In particular, the vital tourism sector was more upbeat. There was also evidence of stronger consumer demand, as reflected in a reassuring gross domestic product (GDP) growth report for the fourth quarter of 2021. For 2021 as a whole, GDP expanded by 1.6%, which was far better than the market had expected. The Bank of Thailand’s February policy statement noted that prices would be higher in the first half of 2022 due to some temporary factors, but there was no indication of a broad-based increase in the prices of goods and services.

Foreign investors return to Indonesia

Indonesian assets also performed well (+0.84%) amid a meaningful pickup in demand. February saw foreign investor holdings of Indonesian fixed income increase by IDR 9.3 trillion – a move that partially reversed the sizable outflow of IDR 83 trillion witnessed last year. Meanwhile, Bank Indonesia left the interest rate unchanged at 3.5%. This was despite consumer inflation rising to 2.18% in January 2022 and growing expectations that the US Federal Reserve (Fed) will raise interest rates and reduce its economic support program at a quicker-than-expected pace. The central bank emphasized that inflation should remain manageable and within its 2%–4% target range for 2022, as the gap between the economy’s actual growth and its ability to expand remains negative.

Currency strength provides support

China delivered a positive return (+0.52%), mainly due to the renminbi’s position as a managed currency that tends to outperform when global risk intensifies. Also, despite repeated COVID outbreaks and a weak housing market, China’s growth has remained resilient, led by manufacturing exports. However, threats to the growth outlook remain, given surging global oil prices and slower overseas demand – especially from the EU, China's second-largest trading partner.

Malaysia boosted by higher oil prices

Malaysia experienced flat returns over the month (+0.06%). The market expects Bank Negara Malaysia (BNM) to leave interest rates unchanged (1.75%) at its March 2022 policy meeting. As the only net oil-and-gas exporter among the major emerging-Asia economies, Malaysia is set to benefit from higher oil prices. Furthermore, its fuel subsidies mean that a hike in energy costs will have less of an impact.

Inflation concerns dent investor confidence in Korea

Korea’s bonds weakened over the month (-0.34%). Even though the Bank of Korea (BoK) kept interest rates unchanged at 1.25% – a unanimous decision that was in line with expectations – the sharp increase in the BoK's inflation forecasts for 2022 (from 2% to 3.1%) and 2023 (from 1.7% to 2%) led investors to believe that price rises are more ingrained than previously thought. Current global tensions could also cloud the BoK's timetable for a return to more ‘normal’ monetary conditions.

COVID restrictions and interest-rate worries dampen Hong Kong

Hong Kong was down by -0.41%, with the local bond and foreign exchange segments losing momentum. From travel bans to business closures, tighter virus control measures have raised the possibility of an extended slump. Also, given Hong Kong mirrors US monetary policy (due to a linked exchange rate), it will be forced to raise borrowing costs when the Fed hikes interest rates. According to a Bloomberg survey of economists, GDP growth is now predicted to contract by 1% in the first quarter of 2022.

Cost pressures cloud Singapore’s outlook

Singapore also retreated in February 2022 (-0.91%), with local bonds and FX underperforming. The Monetary Authority of Singapore (MAS) faces high commodity prices, supply-chain bottlenecks, and labor shortages. And in a surprise announcement well in advance of the scheduled decision in April 2022, the MAS will allow the Singapore dollar to strengthen more quickly against other currencies. Indeed, rising cost pressures from elevated oil prices, at a time when core inflation is at its highest in more than nine years, could see the MAS adopt a more hawkish policy stance.

Rising prices unsettle investors in the Philippines

Finally, the Philippines was the region’s worst performer (-2.46%), which was largely driven by the local-bond component. At its policy meeting in February 2022, the central bank raised its inflation forecasts to 3.7% for 2022 and 3.3% for 2023. Philippine bonds subsequently sold off amid fears that rising oil and food prices, coupled with a depreciating peso, may trigger further inflationary pressures. That said, the central bank signaled that it had no intention of following global central banks by raising interest rates, given its commitment to supporting economic growth. Also, the bank expects inflation to ease and return to target in 2022.

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